Some of Freeport’s shareholders are upset because, unlike those of McMoRan and Plains, they don’t get to vote on this massive deal. Is that legal? The answer is clearly yes.

Freeport is incorporated in Delaware and its stock is listed on the NYSE. Shareholders of a company doing an acquisition are only entitled to vote on a transaction in three circumstances, two required by Delaware law and one by the NYSE.

A shareholder vote is generally required for a merger, but only if the public company is an actual party to the merger. As is typical in acquisitions, each of McMoRan and Plains will be merging with subsidiaries of Freeport so no vote is required of Freeport shareholders.

A shareholder vote would also be required if Freeport’s Delaware charter authorized less than the maximum number of shares to be issued in the deals. But Freeport has plenty of authorized and unissued shares.

Finally, the NYSE rules require a shareholder vote if a listed company is issuing more than 20% of its shares in an acquisition. Much of the consideration is going to be cash so Freeport will be well under that threshold. The NYSE rules do not contain any limitation on how much money can be borrowed to finance a deal.

But even if not required by law, wouldn’t Freeport have been able to purge the conflict issues by asking its shareholders to vote?

Not really. Half of Freeport’s directors sit on the McMoRan board (and several have a significant financial interest in McMoRan). As a result of the directors’ interests in the deal, in any litigation challenging the board’s decision on the deal, the Delaware courts would likely apply an “entire fairness” standard to the transaction. That means that if the court finds the deal unfair either as to the terms of the deal or the process by which it was negotiated, it could enjoin it, whether or not it has been approved by shareholders. (Anyone but a lawyer might find it a little strange that a judge—who probably has no formal training in finance or business– gets to decide if a deal is fair, but the shareholders have no say.)

A Freeport shareholder vote could shift the burden of proof and require the plaintiffs to prove that the deal is unfair (as opposed to the Freeport proving the fairness of the transaction). But the parties to the merger already have another way of shifting the burden of proof without a shareholder vote. By establishing an independent committee of the board of directors, with its own legal and financial advisors, as Freeport said it did, the burden can be shifted even if Freeport shareholders have no say in the deal.

And negotiating for a shareholder vote when it is not required can be difficult. The independent committee of McMoRan and the Plains board would not have been enthusiastic if Freeport’s shareholders had the right to vote the deal down. They would have viewed it as giving Freeport an option to walk away. That’s true even though the respective deals are conditioned on a vote by the Plains and McMoRan shareholders (which is required by Delaware law). Indeed, in McMoRan’s case, the merger is also conditioned on a vote of the holders of a majority of the shares not owned by Freeport, Plains and the officers and directors—a so called “majority of the minority vote.”

There may be one other factor in not having a shareholder vote. As the Wednesday’s Journal article pointed out, the two executives who work at both Freeport and McMoRan, whose interest in McMoRan totals around $80 million, will receive Freeport options in lieu of their McMoRan options. That is not unusual. But what could have been unusual is that, if there were a Freeport shareholder vote, Dodd Frank may have required a “say on pay” golden parachute vote on the options being issued to these executives.

The vote would not have been binding, but could have been embarrassing—particularly since in 2011 Freeport lost its annual say on pay vote. And although this year it won its say on pay vote with a 67% vote in favor of the executive pay, if controversy continues to swirl around this deal through the 2013 annual meeting, Freeport could again have some issues on its say on pay vote.

At the end of the day, Delaware law vests in the directors the right to move forward on acquisitions structured in this manner with no vote by the acquirer’s shareholders. To the extent there are other large deals that provoke this level of controversy (HP’s acquisition of Autonomy comes mind as a historical example), expect institutions to begin to push companies for new governance provisions in corporate by-laws that give shareholders more of a say on huge acquisitions which fundamentally change a company or limiting the number of authorized shares that can be used to do these big deals. They have made their voice known on other issues like staggered boards and poison pills. Changes in governance happen slowly, but do occur.

Comments (1 of 1)

FCX reflects the American Companies are representing with bunch of well connected business men and always incahoots to protect themselves and screw the shareholders and employees. Yhey made millions but shareholders lose stock values and som eemployees lose their jobs and our legal system ok with it because the lawyers get paid in the deals too.lol.
Wake up call American unless we all speak up an dvote fo rth eright ones. we are always get screwed by the top 2% wealthy people out there.lol.
Do you still want to have the same self serving politicians representing us in DC? think again.

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Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s David Benoit is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.